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Posted 6/16/2000
Kenner & Niederhoffer
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Extra!
On baseball, strategy and the technology revolution
We looked at companies that pour big money into research, and guess what? The 19 on our list climbed 9% in the last three weeks. And we ponder whether the satellite radio industry will score or strike out.
By Laurel Kenner and Victor Niederhoffer
Baseball is an allegorical play about America, a poetic, complex and subtle play of courage, fear, good luck, mistakes, patience about fate, and sober self-esteem…. It is impossible to understand America without a thorough knowledge of baseball.
-- Saul Steinberg
The market had a typical baseball-like week, as is appropriate for the end of spring. Both the Nasdaq 100 ($NDX.X) and the S&P 500 ($INX) ended with small gains of less than 1%, and the Dow ended with a small loss of 1.5%.
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However, within the lazy net moves, some of the markets tore up the pea patch -- running around, as Red Barber used to say, like a bunny with his tail on fire.
The Dow ($INDU) managed to drop 265 points on Friday. The Nasdaq ($COMPX) alternated down and up 3% for the first four days before setting in for a lazy 0.4% fly ball on Friday. The S&P actually had three days with swings of around 1%, a change from the lull in the previous week, and in four of the five days, the last half-hour of the inning saw swings of close to 1%.
The mistress of markets follows the adage of the great checker teacher Tom Wiswell: "Moves that disturb your position the least disturb your opponents the most." Without in any way upsetting her equilibrium, she managed to shake the chips away from many a weak long and short. Next week, we can expect her to show her hand.
We would tell you which way that hand will play out if we could, but we are not able. Like most forecasters, we have no clue most of the time, and we have too much pride to come up with a "guaranteed accurate" prediction such as "The market will be range-bound next week between Dow 10,000 and 11,000, or Nasdaq 3,000 to 5,000."
Furthermore, even if we did have a forecast, it would not be of value because the expected move on the downside would not be sufficiently negative to overcome the 10% positive drift that U.S. markets have seen over the last 200 years. We will therefore not focus on our fears that the recent drop in options volatility is coming perilously close to levels that have been somewhat bearish over the past three years.
Kenner & Niederhoffer
Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor. In a special series of weekend columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community.
Nor will we focus upon the ominous rise of the price of gold toward the magic round number of $300 an ounce. Such attention, and the related statistics that we could put on the table, would merely provide the reader with a potential dessert for a day.
Tech-stock game plan
We will turn instead to some insights that will provide a market meal for a lifetime. Our game plan was sparked by a visit to our local newsstand. Below the counter, because they were too heavy to hang, were three magazines weighing an average of one pound each, with an average of 350 pages inside: Red Herring, Wired and Upside. This compares to 100 pages and 6 ounces for Time and Newsweek.
What the visit did for us was to reveal how completely technology has changed the focus of interest and values in our economy.
There are several approaches that we would recommend for participating fully in the technology revolution. One of them is to buy the companies with the highest relative levels of research. The usual ratio used is the total research expense divided by the total sales of a company. We provided a list of the 19 companies with the highest research-to-sales ratio in our article of May 19. Research is the key to future profitable products in a dynamic economy. It is no surprise that in the last three weeks, these companies went up an average of 9%, versus about 11% in the Nasdaq. We reiterate our recommendation of them, and list them below.
| Our Research All-Stars |
| Advanced Micro Devices (AMD, news, msgs) |
| Alza (AZA, news, msgs) |
| Analog Devices (ADI, news, msgs) |
| General DataComm Industries (GDC, news, msgs) |
| Cabletron Systems (CS, news, msgs) |
| Cadence Design Systems (CDN, news, msgs) |
| Cypress Semiconductor (CY, news, msgs) |
| Input/Output (IO, news, msgs) |
| LSI Logic (LSI, news, msgs) |
| Eli Lilly (LLY, news, msgs) |
| Midway Games (MWY, news, msgs) |
| Northrop Grumman (NOC, news, msgs) |
| National Semiconductor (NSM, news, msgs) |
| Pfizer (PFE, news, msgs) |
| Pharmacia (PHA, news, msgs) |
| Texas Instruments (TXN, news, msgs) |
| Union Pacific Resources (UPR, news, msgs) |
| Vastar Resources (VRI, news, msgs) |
Another approach that we have developed to participating in the technological boom came from serendipity. We were fortunate enough to pinpoint the ultimate cause of the cratering of biotech stocks that came after President Clinton announced March 14 that human life belonged to humans. The statement came at a joint press conference with British Prime Minister Tony Blair. The immediate result was panic by U.S. biotech investors; the Amex Biotech Index plunged 36% from the day before the speech to a low on April 17. The question arose: Why Tony Blair?
The thong theory
The story circulating in biotech circles is that it was the fault of Monica Lewinsky's thong. This item, irresistible to some susceptible men, led the president to seek support from mature, worldly European men -- men like Tony Blair -- who were so involved in deep pursuits that they couldn't see what all the fuss was about. And after Blair proffered his support, he was able to call in the markers and try to help out his ailing biotech industry by striking out against those naughty biotech companies in the United States that were grabbing all the patents and educated British biotech brains.
Anyway, that was what we heard. We checked with the leading experts in the biotech industry we knew, and they confirmed that it was common knowledge in the industry.
But here's where the serendipity comes in. A reader, J. William Fuller, wrote in to correct us. The fault, according to Fuller, lay not in the thong, but in the DNA test. The president was so enraged with those test results that he took the first opportunity to strike back against the industry's patents.
| The Week Ahead | |||
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We immediately realized that Fuller was a man of great knowledge. And we requested in a series of interviews that he share this knowledge with our readers, with particular reference to our editor's admonition to tell us the right stocks to buy right now.
One thing led to another, and Fuller gave us some insight on another new industry: satellite radio. Within the next few weeks, "a new American experience will be born – well, not the whole baby, but the foot, anyway -- as the first satellite dedicated to bringing commercial-free, CD-quality radio to your car is launched," writes Fuller, whose $25-million hedge fund was up 99% last year and has gained 54% so far this year.
Fuller, who earned a bachelor's degree in philosophy and a master's in religious studies, started out in the financial business as a broker in 1983 with the help of his wife, a psychologist, and founded Fuller Capital Management in September 1998. He enjoys his four kids and working on his cattle ranch. He knows he's not going to get an edge by buying General Electric (GE, news, msgs) shares, so he concentrates on about 15 companies that are giving birth to new businesses and are small enough to allow him access to management.
Satellite radio's sex appeal
Two of his holdings are Sirius Satellite Radio (SIRI, news, msgs) and XM Satellite Radio Holdings (XMSR, news, msgs), the only two companies given satellite radio licenses by the Federal Communications Commission. The attraction of both companies, says Fuller, is that "for $9.95 a month (plus a couple of hundred for a receiver), you'll be able to pick a channel and drive from LA to NYC with CD-quality sound, no commercials, and never lose the signal."
Sirius, in which Fuller has the bigger stake, will probably be first to market. The first of its satellites has been shipped to the launch pad, and is set for launch between June 28 and July. The two others in the constellation are set to go in September and October. The schedule was set back last year by explosions of Russian Proton rockets and development delays with the Lucent chipsets for radio receivers.
We spoke to chief executive David Margolese today, and he told us the chipset problems have been resolved. "In the first quarter, we expect to see radios going to Detroit," he said.
Ford Motor (F, news, msgs), DaimlerChrysler (DCX, news, msgs) and BMW "have all said it is their desire to install in every car," Margolese said. That falls somewhat short of a promise, of course, and demand will determine whether the car makers follow through.
Sirius will reach the breakeven point at 2 million subscribers, and Margolese expects that to happen "pretty quickly." The company, which has half a billion dollars in cash, counts DaimlerChrysler as one of its three biggest investors. Ford invested $20 million last year for 800,000 shares -- about 3% of the company -- and holds warrants to buy 1 million more, said Ford spokeswoman Farah Warner.
Kenner & Niederhoffer
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While Fuller is an admirable eagle with a track record that could climb Mount Everest, we are still prone to the NIH philosophy -- "if it's not invented here, it's no good." We turned for a counter-opinion to a friend of ours whose knowledge of this field surpasses our own knowledge of checkers and squash. He pointed out to us that the car makers adapt new products carefully and slowly, and that technology has a way of changing rapidly during the time that it takes a company to reach the consumer acceptance level that would generate a suitable return on investment.
In particular, he is concerned here that by the time these products are widely accepted by consumers, that a fourth-generation cellular technology permitting two-way connections to the Internet will provide an alternate method for consumers to receive this programming. And he wonders how many consumers not involved in long hauls will wish to buy the equipment and pay the monthly fees for short-haul traffic. While he wishes XM Satellite Radio and Sirius Satellite Radio the best of luck, he was not convinced enough to invest his own money in them just yet. But that's what makes a ball game.
He has an alternate suggestion for investment: the car companies themselves -- Ford, General Motors and Daimler Chrysler. They're a bit old-fashioned, but they're cheap and steady moneymakers, and they're not averse to using technology when they can make a profit thereon.
There are really two seasons in baseball -- the leisurely first half and the frenetic second half, which climaxes in the World Series, the greatest sports event in the country, in our opinion. Our interest in the World Series will be heightened this year because we will calculate the winner of the contest between the technology picks of Fuller and the old-fashioned car maker portfolio of our learned friend.
At the time of publication, Victor Niederhoffer maintained long and short positions in index futures and options. His position changes regularly from net long to net short as the market fluctuates in the short term, but remains highly bullish for all time periods forward. Laurel Kenner is long Akamai, Commerce One, Human Genome Sciences and Qualcomm. Mail Laurel and Victor at lkvn@hotmail.com.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.